The topic that is causing the most anxiety for investors in 2021 is the potential sharp rise in inflation and the negative impacts that this could create. You can’t go a single day without seeing negative inflation related stories such as:
The most jaring example of this fear are the google search trends related to inflation which are off the charts:
Seeing as this is such a key topic, let’s explore this further to better define inflation, and more importantly, discuss how investors can take advantage of inflation.
1. What is inflation?
According to Investopedia, inflation is defined as the decline of purchasing power of a given currency over time which is caused by a sustained increase in the prices for goods and services. One of the main drivers of inflation fear today is the excessive money printing by the Federal Reserve to combat the Covid-19 pandemic. By flooding more money into the system through stimulus checks and other mechanisms, the dollars we hold today could suddenly become less valuable, which then leads companies to start raising prices across the board. Arguably even worse, inflation also erodes the value of your traditional stock and bond portfolio. Even famed investor Warren Buffet fears inflation: “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital.”
2. Taking Advantage of Inflation
Luckily for investors, there is a mechanism to not only hedge against inflation risk but to actually take advantage of it: investing in real estate. In addition to real estate’s many other benefits, it is also a unique asset that takes advantage of rising prices. This is accomplished through appreciation, increased rent prices and depreciating debt.
As inflation increases prices for goods and services, it also raises the value of your real estate investment property. This property appreciation has historically far outpaced the rate of inflation which increases the net worth of the investor. In addition, rental properties can also increase rent prices during an inflationary environment resulting in more cash flow for investors. Finally, by leveraging fixed rate mortgages on your rental property, your debt depreciates naturally as rates will continue to rise, yet yours remains constant, resulting in the value of the payment decreasing.
If you agree that investing in real estate can help you combat inflation and would like to explore how to do so in a no-hassle, hands-off manner, feel free to reach out.